Will QE2 Help the Economy?
Quantitative Easing #2 is on it's way. Bernanke will print money and give it to the banks again. Economy is not an engine that Bernanke can oil and grease to make it run smoother. There are many factors that are beyond FED's control. Our money supply is not what FED prints, but it is what we borrow from the banks. Banks create money when we borrow:
http://www.tradingstocks.net/html/banks_create_money.html
This new money inflates the money supply and makes it easy to earn. This is why we had inflation for many decades as our debt expanded. This is why at times of recession, the government wants low rates. This is why they allowed sub-prime. They needed more borrowers to step up to the game. No 20% down, liar loans, 8K home buyer credit... But there comes a time when none of it works.
1. FED makes credit available
2. Banks do not want to lend because they don't think they will get their money back.
3. Borrowers do not want to borrow because they don't think they can pay it back.
FED or Obama do not control the market. They cannot force people to borrow or lend. Eventually, free market forces will prevail. FED does not control the markets:
http://www.kondratieffwavecycle.com/economy/the-federal-reserve-does-not-control-the-market/
There is not much Obama or Bernanke can do. The best they could do is do nothing and get the government out of the economy. Today's problems are not about what we are doing now, but what we have already done for the last 70 years. We have expanded credit to unsustainable levels. Now it is deflating. And we want to get sober with more debt. It won't work. It will make things worse after a brief calm.
Banks have been lending to the wrong borrower for decades. Since 1980s loans to the businesses have contracted, and loans to the consumer has expanded. Business loans are used to create value. They contribute more to the real economy. The likely hood that they will be paid back is higher. But consumer loans do not provide value. Consumer economy is a myth. Consumers consume. They do not produce. Today, banks are 98% invested in consumer loans. The collateral for consumer loans depreciate in time. They do not create value. This is the cause of bank troubles today. 50 years ago banks would be invested in pristine US government bonds. If that was the case now, a housing market crash would not effect the banks much. Alas, it is too late.